Management Accounting

MANAGEMENT ACCOUNTING • • • • • • • •

ABHISHEK KAPOOR SUCHISMITA DHAR RITESH YADAV SUMEET KOCHHAR SUNIL KUMAR MAHESH KUMAR DHRUV GUPTA PANKAJ

• • • •

INTRODUCTION PROFILE ,SWOT FIN STATEMENT RATIO ANALYSIS

• • • •

ACC STANDARDS - I ACC STANDARDS FUTURE PROSPECTS CONCLUSION

AIR INDIA LIMITED Started in 1933

Main Bases Chhatrapati Shivaji International Airport

Operational Areas

SWOT ANALYSIS Strengths: • • • •

First Mover Advantage Merger of AI and IA Cost Differentiation Well Positioned

Opportunities: • • • •

Huge market potential Un serviced Hinterland Tax Holiday on Aircraft leasing Air Charters

Weaknesses:

Threats:

• Fixed Cost perishable product • Questionable on time performance • Corruption

• • • • •

Competition Oil Price fluctuations Open Skies Policy Poor Airport Infrastructure Overcapacity

FINANCIAL RATIOS

LIQUIDITY RATIOS Current Ratio = Current Assets/Current Liabilities Inference : The Current ratio of Air India increased due to increase in T. Assets . •

Quick Ratios = Liquid Assets/Current Liabilities Inference :Quick ratio of Air India increased due to increase in Loans & Advances

2006

2005

31625/24622.2

21131.7/28761.1

1.28

0.73

•

2006

2005

(1879.1+10347)/ 25622.2

(2317.6+358)/ 28761.1

0.496

0.093

•

Inventory Turnover Ratio =Costs of Goods Sold/Avg Inventories. Inference : The Inventory ratios in increased due to increase in Operating expense.

2006

2005

92333/ (4613.6+3534.5)/2

76357.8/ (3534.5+2678.3)/2

22.6 times

24.58times

•

Debtor Turnover ratio = Sales/Avg Debtors Inference : Air India remained outstanding on average for 71 days as to 58.71 days in 2005 indicating deterioration in collection

2006

2005

92333/ (4613.6+3534.5)/2

76357.8/ (3534.5+2678.3)/2

5.07

6.131

/day= 360/5.07=71 /day= 360/6.13=58.71

SOLVENCY RATIOS • Debt/Equity Ratio = T.Debt/Shareholder’s equity Inference: It is increased due to increase in Debt. Liability/ Equity Ratio = (Debt+Liability)/Equity Inference:Liabilities increases in year 2006 • Asset to Debt Ratio = T.Assets/Debt Inference: Increase in Debt results in decrease in ratio •

2006

2005

36219.1/3398

12616.9/3249.6

10.65

3.88

2006

2005

(36219.1+24622.2)/3 (28761.1+12616.9)/3 398 249.6 18.172 2006

12.733 2005

(33807.8+870.2+316 (25023.3+582.6+211 25)/36219 31.7)/12616.9 1.83

3.704

PROFITABILITY RATIOS • Profit Margin = PAT/Sales Inference: Prfit margin decrease marginally due to decrease in profit after tax .

•

Assets Turnover = Sales/Avg.Assets Inference Increase in assets results in Decrease in assets turnover

•

Return on Assets(ROA) = PAT/Avg assets Inference: ROA decreases due to decrease in PAT

2006

2005

149.4/63310.5

963.6/58265.1

.0023

.01

2006

2005

63310.5/ (66303+46737.6)/2

58265.1/ (46737.6+38765)/2

1.12

1.36

2006

2005

149.4/ (66303+46737.6)/2

963.6/ (46737.6+38765)/2

.264%

2.2%

Contd.. • Return on Equity(ROE) = PAT/total Equity Inference: Decrease in PAT results in lowering of ROE. • Operating Ratio = Operating Expense/Net sales

2006

2005

149.4/ (3398+3249.6)/2

963.6/ (3249.6+3145)/2

4.4%

30.12%

2006

2005

92333/63310.5

76357.8/58265.1

1.458

1.310

Ratio Analysis Balance Sheet

700 600 500 400 300 200 100 0

Current year Previous Year

Current Ratio

Liquid Ratio

Debt Euity Ratio

Total Assets to Debt Ratio

Ratio Analysis Profit & Loss

3.00

2.00 Current Year Previous Year 1.00

0.00

Gross Profit Ratio

Net Profit Ratio

ACOUNTING STANDARDS

DIRECTORS STATEMENT • The Board of Directors of the company confirm that, • In preparation of annual accounts, the applicable accounting standards have been followed and there has been no material departure; • The annual accounts have been prepared on a ‘going concern’.

DIRECTORS STATEMENT • The accounting policies were applied consistently. • Sufficient care has been taken for the maintenance of adequate accounting record in accordance with the provisions of companies act 1956 for safeguarding the assets of the company,

AS-1 DISCLOSURE OF ACCOUNTING POLICIES • Accounting convention: The accounts have been prepared with going concern concept on accrual basis under historical cost convention, except as specifically stated , and are in compliance with generally accepted accounting principle and AS referred to in Section 211 (3c) of the Companies act,1956.

AS-1 DISCLOSURE OF ACCOUNTING POLICIES • Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumption that affect the reported amounts of assets and liabilities at the date of financial statements and the reported amounts of revenue and expenses during the reporting period

AS-1 DISCLOSURE OF ACCOUNTING POLICIES • Use of Estimates: • particularly for Traffic Revenue, Provisions for liabilities, depreciation, Obsolescence, Doubtful Debts, Advances and Contingent liabilities. The difference are recognised in the period.

AS-1 DISCLOSURE OF ACCOUNTING POLICIES

• Fixed Assets: stated at historical cost. • Risk and rewards of Finance leases for Aircraft fleet and Equipment are transferred to the co.

AS-1 DISCLOSURE OF ACCOUNTING POLICIES •

Depreciation Straight line method

Inventory Spare parts stores and tools are valued at prime cost on weighted average basis • Impairment of assets •

AS-1 DISCLOSURE OF ACCOUNTING POLICIES

• Fixed Assets: • Lease hold land is amortized over the period of lease • Intangible assets are amortized over its useful life or five years whichever is lower

AS-1 DISCLOSURE OF ACCOUNTING POLICIES

• Investments: • Long term investments are stated at cost less diminution other than temporary, in value, if any. • Current investments are valued at lower of cost and fair market value.

AS-1 DISCLOSURE OF ACCOUNTING POLICIES

 Obsolescence provision for non-aircraft stores and spares is made to the extent of non-moving inventory for a period exceeding five years.  relating to Dry Lease aircraft fleet, is made on the basis of completed lease period compared to the total lease period as at the year end.

AS-1 DISCLOSURE OF ACCOUNTING POLICIES • Foreign currency translation • Foreign currency loans • Revenue and expenditure translations

AS-2 VALUATION OF INVENTORIES Prime cost Weighted Average Method Obsolescence provision for aircraft stores and spare parts Relating to aircraft fleet that have completed the useful / statutory life is made in full – Other than mentioned above is made at the rate of 3% on inventory purchased during the year and forming part of the closing inventory and at the rate of 6% on the balance inventory on an annual basis  Spare parts stores and tools are valued at prime cost on weighted average basis.   

AS 3 : Cash Flow Statement • Cash flows are reported using the indirect method, whereby profit before tax is adjusted for the effects of transactions of a non-cash nature and any deferrals or accruals of past or future cash receipts or payments. The cash flows from regular operating, financing and investing activities of the company are segregated.

AS 5 : prior period items • The income and Expense which arise in the current period as a result of errors and omissions in preparation of financial statements of one or more proir period are considered as Prior Period Items and are shown separately in the financial statements.

AS 6 : DEPRECIATING ACCOUNTING • Straight line method, except – Rotables of AF and Eng which have completed the useful life are depreciated over the remaining commercial life of the respective aircraft based on airworthiness as certified by DGCA.

AS 6 : DEPRECIATING ACCOUNTING • Straight line method, except – Increase/decrease in cost arising on account of translation of foreign currency liability for acquisition of fixed assets is amortized over the residual life of the respective assets. – The vehicles are depreciated at 14.29% considering useful life of 7 years – Depreciation provided for year of acquisition and no depreciation for year of disposal

AS-9 : REVENUE RECOGNITION • Passenger and Cargo sales are recognised as revenue, net of incentives on sales, when the service is rendered. • Service remain to be rendered, are reflected in the accounts as Current Liabilities under the head “Advances from Customers”.

AS-9 : REVENUE RECOGNITION • The pool revenue is accounted on an accrual basis as per the arrangement with the airlines concerned. If details of passenger carried is not received, the Revenue is booked on an estimate basis as per the arrangements with respective pool partners.

AS-9 : REVENUE RECOGNITION • Income from Interest is recognised on time proportion basis and in respect of dividend is recognised when right to receive the payment is established. • The claims receivable from insurance company are accounted for on their acceptance by the Insurance company.

AS-9 : REVENUE RECOGNITION • Passenger and Cargo sales are recognised as revenue, net of incentives on sales, when the service is rendered. • Service remain to be rendered, are reflected in the accounts as Current Liabilities under the head “Advances from Customers”.

AS-10 : ACCOUNTING FOR FIXED ASSETS • stated at historical cost. • Aircraft fleet and Equipment are stated at purchase price and other incidental costs, including interest incurred up to date delivery. Exchange differences on conversion of foreign currency loans taken for acquisition aircraft are adjusted to the cost of the aircraft. • Risk and rewards of Finance leases for Aircraft fleet and Equipment are transferred to the co

AS-15 : ACCOUNTING FOR RETIREMENT BENEFITS • Provident fund is contributed to Air India employees PF and charged to P&L account of the year • Gratuity Leave encashment and Post retirement medical benefits for staff recruited in India are provided on actuarial valuation basis as at the Balance Sheet date. • Foreign recruited will have local laws applicable on Balance sheet date

AS-17 Segment reporting • The company is engaged in airline related business, which is its primary business segment, and hence, segment results are not disclosed.

AS-18 : Related Party disclosures • • • • •

Related Parties Mr. .v. Thulasidas, C & MD Mr. V.K. Mehra Director Eng Mr. Sudesh Director Fin Mr. Amod Sharma Director Pers

• Disclosures regarding party relationship and transactions with state controlled enterprises are not disclosed as mentioned in para 9 of AS18

AS-22 : ACCOUNTING FOR TAXES ON INCOME • Provision for current tax is made in accordance with the income tax act 1961 • Deferred tax is recognized on timing differences between book and taxable profit using the tax rates and laws that have been enacted as on the Balance Sheet date. It will be C/F to the extent that there is a virtual certainity that assets will be realized in future.

AS-26 : INTANGIBLE ASSETS • Software • Brand Equity

AS-28 : Impairment of Assets • The carrying value of Fixed Assets of the identified cash-generating unit are reviewed for impairment at each Balance Sheet date to determine whether there is any indication of impairment. • The net selling prices of the ac fleet and equipment are estimated by the management using the published sources as available.

AS-28 : Impairment of Assets • If cash generating unit exceeds its estimated recoverable amount an impairment loss is recognized in the P&L account and the assets of the cash generating unit are written down to their recoverable amount.

AS-28 : Impairment of Assets • The company has carried out assessment and there has been no impairment loss during the reporting year.

AS-29 : Provisions and Contingent Liabilities • Provisions are recognised in the accounts in respect of present probable obligations, the amount of which can be reliably estimated. • Contingent liabilities exceeding Rs .1 million in each case, are disclosed .

Deficiencies in the Current System • Escalating costs. • Fewer passenger numbers, particularly in the premium class. • Low fares with a gradual shift of passengers from legacy full service airlines to low cost airlines. • Decline in carriage of cargo. • Excess capacity in a ‘falling’ market.

Hard Facts • Air India has never received budgetary support, except for the initial equity. • Aircraft acquisition after a 15-20 year gap has resulted in a large fleet order and high debt burden. • Internal resource generation in the current context is insufficient to fund aircraft acquisition costs. • The magnitude of debt burden and rising cash deficit in a ‘falling’ market necessitates aggressive financial restructuring. • There are several national carriers across the world who have received financial support from their respective Governments e.g. Japan Airlines, China Southern, China Eastern, British Airways, etc.

After Merger Effect • Fewer people to fly AI acc. to DGCA data • Prior to merger load factor of Air India (domestic) was 61.2% but after merger it ranges between 61.3 to 58.3%. • Indian Airlines also have lowest load factor in the year of merger despite brand new planes in its fleet.

Measures Suggested • Product upgradation through improved on time performance and enhanced customer touch point experience. • Seamless connectivity from interior points of India to destinations abroad. • Pre-mature retirement of old aircraft, including leased aircraft, and their replacement with a newer fuel efficient fleet. • New aircraft with best-in-class passenger amenities. • Rationalization of routes and capacities.

How Air India is going to manage its profit in 2009? By targeting efficiency and improved productivity. Controlling internal costs by revising wages. Wastages should be tackled. Biggest savings through network integration, improvement in schedules, passenger loyalty programme. • They have managed to get good savings by two means – one is aircraft insurance and second one is its contract with the public sector companies ,it used to drive good contract with lower price. • • • •

Lessons Learnt

• Professional Working Environment. • Practical Knowledge • Suggestions

Air India Roadmap • Focus on execution, accountability, cost reduction and revenue generation. • Adopt international best practices in airline operations, MRO activity, airline terminal services, cargo, aviation skill development, corporate governance and HR. • Be accountable to the stakeholders.

Bibliography • http://home.airindia.in/SBCMS/Webpages/ Annexure • Narayanswamy Analysis of Financial Statements • www.pdfcoke.com • http://www.thehindubusinessline.com/ • www.dgca.in • http://www.answers.com/topic/air-india

The End